Unless you live under a rock or don’t drive a car, you have no doubt heard about or felt the state of the US economy. It’s in a state of well let’s say ‘confusion’ with indications it’s moving in the wrong direction. Gas prices are at record highs, people are filing for bankruptcy, they are losing their homes, the government has a record amount of debt, the stock market is going down, etc. etc.
So where does this leave us entrepreneurs who want to raise funds to take their businesses to the next level? Well, that’s a good question and a challenging one to answer.
I’ve had a handful of meetings with potential investors and a couple of them have expressed interest in participating, but they might change their minds given what’s going on in the economy. As the saying goes “It’s not in the bank, until it’s in the bank!” Fred Wilson, a venture capitalist in NYC, linked in his Read the Blogs post to a post on the Bear Stearns bailout by JP Morgan, which illustrates why even if you think it’s in the bank, it might not actually really be in the bank! Our personal savings accounts are also going down with the market.
I had several conversations with entrepreneurs coming from different parts of the country at SXSW Interactive who have been struggling for a while to raise funds for businesses that are up and running with strong visitor and user traction.
So despite only being less than two months into the process, all of this has forced me to revaluate my fundraising plans for Babble Soft. Entrepreneurship is not for the faint of heart as there are many ups, downs, and false starts. The economy changes however have a huge impact on the success or failure of a startup. If the economy is doing great you get all sorts of crazy new ideas/businesses popping up with chances to live and prove themselves. If it’s bad, even the companies with wonderful ideas can suffer, die out, or never even get a chance to shine.
The good news is that of all the industries out there (except for maybe the alcohol industry), the baby market is fairly recession proof. People don’t stop having babies nor do they stop buying things for their babies or things to help them take care of their babies. The bad news is that what we are trying to do at Babble Soft does not yet have a predefined “mental need or want” (because it’s so new) like say bouncy chairs, bright/shiny toys, Baby Einstein videos, or diapers.
On the plus side, we have not taken any outside money to date so we don’t have to worry about how and when we pay investors back like some other start-up companies. The downside is that if we don’t raise money right now, it will take longer to bring the exciting, potentially life changing vision I have to the world or worse we might miss the market opportunity.
I’m still trying to figure out the best plan of action. I wish we had more money to create a new user experience, enhance our current applications, and create new applications ourselves. I’m evaluating trying to raise a smaller amount of money and growing slower. Now’s the time when the creative juices start flowing!
If you know an entrepreneur, give them a hug (if you can’t give ‘em money) because it’s going to be a tough roller coaster ride for the next probably year or so. Some will be able to hang on and emerge stronger and better, some will get off gracefully, others might fall off unexpectedly, and yet others will wish they had fallen off before they lost their money and lost some of their sanity. 🙂
If any of you have any thoughts, advice, virtual hugs, or even questions please share below…
| Filed under: babble soft
, venture capital
, bear stearns
, fred wilson
, record gas prices
, stock market
, us economy
| 6 Comments »
One of the interesting things about fundraising is the different perspectives you get from potential investors. If they spend enough time to really understand what you are trying to do, they offer great feedback, suggestions, and advice. They also sometimes ask a tough question or two.
I officially started the fundraising process a couple of weeks ago and have had a couple of meetings and a few more set up in the coming weeks. Since many of these angel investors are really busy, getting on their calendar can take weeks!
One question I was asked had to do with the cost of customer acquisition. It’s so hard to tell what that might be given the uncertainty and newness of many business concepts out there (including mine) today. I searched and searched and oddly only found very
dated ancient info (i.e., 1999 – 2001) figures for sites like Amazon.com. At a high-level, the cost of customer acquisition is how much it costs to get a customer/visitor to your site. My guess is for sites with successful viral uptake like facebook the cost is in the cents (i.e. [total marketing and some R&D costs]/number of unique visitors). On the other hand I’ve heard that customer acquisition costs for companies like Vonage are in the hundreds of dollars. Anyone who has seen their mailers and expensive TV commercials can see why that number is so high. Last I heard I think it takes them at least 2 years to break-even on each customer they get.
I even had the MBA student who helped me create the financial model search his resources and no such luck. I would be happy to get information on even what the amount that a magazine like O Magazine or Pregnancy Magazine spends getting one customer to sign up. You’d think that as much has been written about facebook, that their cost per visitor would be somewhere on the Internet, but for some strange reason that information is not readily available. Go figure!
In my quest, I happened upon the following links that might be useful for any other entrepreneurs looking for the same information.
Calculating Customer Acquisition Costs (an online calculator)
Customer Retention and Acquisition (definition and 1999 info on Amazon.com)
On Measuring The Cost of Customer Acquisition (a 1999 Entrepreneur.com article)
There may not be a satisfactory answer (or more likely I don’t have access to the money or resources to help me find it) but at least being aware that there could be an answer is probably not a bad thing. I ended up backing into some numbers using the information in our financial model which to me, the ever optimistic entrepreneur, seemed reasonable enough. 🙂
UPDATE: This post was re-published on Found|Read here. Check it out to see additional comments by their readers.
| Filed under: angels
, angel investors
, babble soft
, cost of customer acquisition
, cost to acquire a customer
, questions by investors
, raising funds
, viral media
| 2 Comments »
Following on my Other People’s Money – The Hunt Begins post, I thought it might be interesting to share what I will be putting in my Fundraising Toolkit. Check out The Entrepreneurial 7 Year Itch to get some additional background.
I plan to raise seed financing from angel investors for Babble Soft, and here’s what I will have in my toolkit.
An Executive Summary. Thankfully people have moved away from the 35 to 40 page business plans that used to be required when I raised money for my first company. Now it’s easier to get your foot in the door with a 5 to 7 page summary. If they are interested, they will ask for additional information. In a typical Executive Summary you will see sections on:
- The Company
- The Problem
- The Solution (i.e., Your Products)
- The Market (including Competitors)
- The People
- The Numbers (i.e., the Financial Projections).
Financial Projections. In my opinion, creating Financial Projections for an Internet startup is often an exercise
in futility that shows you have an idea of how you will make money. Most experienced technology investors know that predicting the future is a crazy process at best especially when you are starting from ground zero and success primarily depends on many viral factors. Financial projections for IBM are much different than financial projections for an Internet start-up. The assumptions you make are the most important part of the model as they give the investor an idea of the homework you have done on the market.
Some venture capitalists like high profile Fred Wilson (a.k.a. A VC in NYC) of Union Square Ventures go as far to say that sometimes you can wait to scale before figuring out and executing your business model when describing his stance on Twitter’s lack of a current business model.
Since Babble Soft is not Twitter, I’m not already a gazillionaire, and I have a million things to do, I have a sharp MBA student, Anand Balasubramanian, helping me create an Advertising and Subscription based model. I love energetic, rock star, cheap, student help! He has done a great job so far building a simple, easy to understand financial model for me.
Visuals. Since I’ll be raising funds for products that do not exist yet, I have engaged a great local design, user experience, and information architecture firm, Projekt202, to create a few mock-up pages illustrating both the web and mobile components of our new applications. They seem as excited about the vision as I am and are taking on some of the financial risk with me. It makes me so happy when I find people who get what I’m trying to do! I’ll also have a demo account of Baby Insights and Baby Say Cheese ready to log in to demonstrate our existing applications.
An Investor Leads List. However you choose to keep track of your calls, meetings, and referrals it’s important to do so. I have met entrepreneurs who want to raise funds who aren’t organized about the process and end up looking a bit flighty. Unfortunately the investors are allowed to be flighty but they usually don’t tolerate too much flightiness in entrepreneurs. Remember: “She who has the gold makes the rules.” After a while it’s easy to forget what you promised to get to whom and who referred you to whom. It’s important to remember at what stage of the investing dance you are in with each potential investor. On this spreadsheet I plan to keep track of:
- Contact Information
- Professional Background
- Who Referred Them to Me
- Investment History
- Typical Investment Size
- What Items They Need From Me, and
- Personal Assessment on the likelihood they will invest.
Passion Tempered With Wits. I think that often the big thing that can swing an investor, especially an angel investor who has been in your shoes before when building his/her company is your passion. Why are you doing this when there are much easier ways to make a buck? What will keep you going? What excites you about the business? I am passionate about helping new parents and caregivers connect and find answers. I am passionate about building a business. I am passionate about finding great people to work with. If that passion is tempered with some logical thinking, that’s a big huge ‘ole plus! All of us entrepreneurs are a bit crazy at times so I just hope I don’t lose my wits in the middle of an investor pitch!
Since I am still working on everything above except for my passion which has recently been reignited, I’ve got a lot to do before the meetings I already have set up with potential investors in the next couple of months. If you have suggestions on other things I should have in my fundraising toolkit, let me know by leaving a comment below. It’s been a while since I have raised money and I’m always open to learning new things.
Join me for the journey. Subscribe to the blog and hold on to your stomachs, it’s bound to be a scary roller coaster ride at times!
UPDATE Jan 12, 2007: Found|Read republished this very post on their blog and called it My Funding Toolkit. Check out that post for some great comments! They have many more readers than my blog currently does so I’m delighted that they chose to share it with their readers!
| Filed under: angels
, babble soft
, venture capital
, angel investors
, executive summary
, financial projections
, fred wilson
, fundraising tool kit
, high tech entrepreneur
, money for business
, passion about business
, raising funds
| 4 Comments »